All other things being equal (wise observers will note that this almost never is completely true), getting customers on service contracts, as much as consumers might not prefer it, could be the single most important action a mobile service provider can take to reduce customer churn.
To be sure, any number of important issues, ranging from recurring service cost, handset cost and handset selection, to customer service, call quality, Internet access speed, billing accuracy and simplicity or network coverage, can be a triggering issue for a customer decision to change service providers.
But you might also argue that maintaining significant differences—much less uniqueness—on any of those attributes is virtually impossible to sustain over time.
Though the relationship between customer satisfaction and loyalty is highly nuanced, one clear trend of the past several years in the U.S. mobile services market is that postpaid or contract customer churn at Verizon and AT&T has been rather low (on the order of 1 percent a month) while churn has been much higher at Sprint and T-Mobile US (on the order of 2 percent).
Image via Shutterstock
Those are low churn figures for a consumer or business service, where churn sometimes reaches 3 percent a month.
Prepaid accounts, sold without contracts, have significantly higher churn, at every company. Though mobile customer churn rates generally have declined since 2010, there remains a huge difference between contract customer and no-contract customer churn rates.
Where as a prepaid account can last two years or less, a contract-based postpaid account often can last six to eight years, according to company reports.
And one might therefore be quite tempted to argue that it is the contracts that account for the big differences in churn behavior, even if all other elements of the experience (service and handset prices, perceived value, network quality, customer service, handset selection) are roughly comparable, which tends to be the case.
Prepaid services, for example, are typically synonymous with “no contract” service. Postpaid services more commonly are contract-based.
In many markets where prepaid service is the norm, monthly churn rates of 4 percent are common, leading to annual churn of about 48 percent, of the equivalent of nearly half the entire installed base of customers.
Where churn is 1 percent a month (characteristic of postpaid services), it takes about four years for a service provider to lose the equivalent of half its customer base.
So any change in the way service is sold (a genuine shift away from contract-based service) should also have churn implications, with direct implications for profit margin, lifetime value of a customer account and gross revenue as well.
In that sense, the growing use of prepaid services in the U.S. mobile market is a strategic problem for most mobile service providers whose financial performance is driven by postpaid and contract service.
Edited by
Alisen Downey 
QUICK LINKS 
